1 Morningstar Direct (all performance percentages are total return based, which include reinvested dividends, interest) Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

U.S. Shares Extend Valuations by $1.1 Trillion in 2014.

Domestic equity averages rallied in 2014, capping Wall Street with its sixth consecutive annual gain, the longest bull market since the 1990s. U.S. indices outperformed most other developed markets, reaching new heights as investors grew optimistic over improvement on the jobs front, increased private-sector profits, heightened M&A activity and corporate buybacks as well as by broadening home and auto sales. On the flip side and in between geopolitical upheavals, American wage growth has been persistently low, as has consumer and wholesale inflation. The Fed’s preferred PCE inflation measure hasn’t been above their 2% target since March 2012.

Investor sentiment remained robust even as the Federal Reserve’s third round of quantitative easing, otherwise known as QE3 stimulus, drew to a close in November. Thereafter the world learned the U.S. economy expanded more than thought during the third quarter, growing by 5%, the fastest pace of GDP expansion since 2003. With consumer confidence at a seven-year high, stocks went on to extend gains after Fed policymakers pledged patience before raising interest rates. Economists’ consensus forecast predicts the FOMC will vote for a 0.25% Fed Funds rate hike around mid-year 2015.

Despite retreating in December for the first time since 2007, the S&P 500 nearly fully rebounded from a near 5% mid-month slide. Remarkably, the benchmark index had more than recovered from four other 2014 selloffs, the worst of which was a 7.4% mid-October pullback, going on to post 53 all-time closing highs. In other milestones, the small-cap focused Russell 2000 Index gained 9.7% during the fourth quarter, reaching a new record high in the process, before ending the year up 4.9%. The Dow Jones Industrial Average reached 18,000 for first time two days before Christmas, taking just 172 days since first reaching 17,000. Not to be outdone, the NASDAQ Composite Index finished the year at its highest level since the technology-bubble peak in March 2000. Of course, a little help from a 40% gain in Apple shares goes a long way.

Overall, the Dow Industrials has risen 172% during the bull market that began in early March 2009. During the same period, the S&P 500 has risen over 200%, meaning it has more than tripled. In other 2014 highlights, including dividends:

Utilities (+29%) rose most among the ten major sectors, led by Integrys Energy, up 49%.

Among all the S&P 500 stocks, Southwest Airlines performed best, up 126%.

REITs returned 32.3% last year, according to the FTSE Nareit Equity Index.

Among the Dow Industrial’s 30 big board stocks, Intel performed best, up 44%.

Treasuries Post Best Returns in Three Years.

The Barclays U.S. Government Bond Index returned 4.9% in 2014, its best annual performance since 2011. Ten-year Treasury yields began the year at 3.04% and helped along the way by accommodative monetary policy, a strong US dollar and becoming the world’s most favored safe-haven debt, the yield plummeted 87 basis points to finish 2014 at 2.17%. The yield on the benchmark U.S. debt is 99 basis points above the average comparable sovereign yields of its Group of Seven peers, nearly an eight-year high according to Bloomberg data.

Even so, the U.S. yield curve, the spread between two-and 30-year yield finished the year at close to a six-year low of 208 basis points. That is 150 basis points tighter than where it began the year at 358 basis points.

In other bond market performance, investment grade bonds, as measured by the Barclays U.S. Aggregate Bond Index, gained 0.1% last month, gained 1.8% during the 4Q to cap 2014 returns at nearly 6%. Non-investment grade high-yield corporate bonds, otherwise referred to as junk status bonds, lost 1.5% last month, trimming its full-year gain to 2.5%, as measured by the Barclays U.S. Corporate High Yield Index. Municipal bonds, as measured by the Barclays Municipal Index, performed very well last year, gaining 1.4% during the final quarter, extending 2014 returns to 9.1%.

Commodities Suffer Their Biggest Loss in Six Years.

The Bloomberg Commodities Index, which tracks the performance of 22 raw materials, plunged 17% last year, its worst annual loss since the financial crisis in 2008. The index retreated a record fourth straight year as crude oil prices collapsed amid a global oil glut. While benefiting consumers with greatly reduced gasoline pump prices, oil futures sank 45% last year — courtesy of U.S. based producers’ greatest oil output in 30 years (i.e. the shale oil revolution) and OPEC’s refusal to reduce production. The rout in oil has also stirred havoc in Russia, helping devalue its ruble currency by around 44%.

At a reduced 2014 growth forecast of 7.4%, China has also dampened commodity demand as the world’s biggest consumer of base metals is seeing its slowest pace of economic activity since 1990. Iron ore futures plummeted 47% in 2014 to $71.26 a dry metric ton. Copper fell 14% this year, the largest drop since a 21% plunge during 2011. In contrast and despite volatility, gold closed the year at $1,185 per ounce, down 1.7% from last year’s closing price.

This information is compiled by Cetera Investment Management.

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